Crowd Surfing Carefully
I don't particularly enjoy crowds. The idea of large groups huddled together doing some combination of pushing, shoving, spitting, groping, coughing, sneezing, sweating, and yelling is, for the most part, unappealing. I'll rough it for certain concerts or sporting events, but I can only handle it about 2 or 3 times in any given year. Same concept goes for waiting rooms, lines, traffic, etc (though, these are simply unavoidable).
A perfect example of my worst nightmare is Black Friday. I prefer to enjoy the holiday's, not be trampled by them. Having said that, there is a time and place for joining the crowd that is the stock market, as long as you take the necessary precautions to protect yourself from the rabid speculators among you.
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When the market takes a downturn, almost instantly, bottom callers come out of the woodwork and provide their downside target levels for initiating new buys. I'm sure you've heard it before, but it's idiotic to attempt to catch a falling knife, (unless you are this guy...). No one knows when the bottom will occur, regardless of their technical analysis skills or fundamental valuation techniques. Granted, using technical analysis, which I do almost exclusively, can provide expected support and resistance levels, but I will be the first to admit that these level's are just possibilities, nothing more. Demand and supply will ultimately determine a bottom, and attempting to catch one is a dangerous game.
Spotting a turn is possible to a seasoned eye (check my article on A Lesson in RSI for one method to spot turns), however riding the trend is a much more profitable venture. Instead of buying the bottom tick, wait for a change in market character and identify the way in which the tide is flowing. In essence, surf the crowd, albeit carefully.
Trend followers simply buy positions in the direction in which the overall trend is moving. Uptrends constitute long positions, with very few short hedges in case of a black swan, and downtrend's typically cause trend followers to move into mostly cash, occasionally playing bounces while also pressing some shorts. In either case, putting the majority of your capital in positions that follow the current trend while protecting with small hedges in the other direction is a prudent methodology. However, identifying the trend isn't as easy as it sounds. The fact is, the direction of a trend depends upon one's desired time frame. Long term trends on a weekly chart may be signaling a primary uptrend, while the daily chart for the same security may be in an intermediate downtrend.
I will discuss ways to identify trends for long term and short term time frames in future posts. Just understand the idea that following the trend is the safest form of investing for most retail investors, yet very few implement a successful strategy for doing so. There is a time and place for contrary investing, however this is only in pocket's of the market at specific times and requires an entirely different mind set. Joining the crowd, with protection in place, will yield significant gains to those who stick to the strategy. Don't play that game of calling the bottom. If you jump to early, you might end up like this guy...
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.